"It is very disappointing," Chakravarthy Rangarajan, chairman of the Prime Minister's Economic Advisory Council, told reporters. "One had not expected such a sharp decline."

A CNBC-TV18 poll had forecast March industrial output growth of 1.5 percent.

Disappointed investors drove the benchmark Sensex index down over 1 percent on the news.

The Reserve Bank of India and the International Monetary Fund, among others, have both said that India is not growing as fast as it could. The RBI has blamed supply bottlenecks, especially in infrastructure, energy, minerals and labor, for the economy's diminished potential, while the IMF has warned that concerns about governance and policy uncertainty are weighing on investment.

India's twin current account and fiscal deficits have also alarmed economists and punished the rupee. The central bank on Thursday ordered exporters to convert half their local foreign exchange holdings into rupees within two weeks, a move designed to bolster the falling currency.

New Delhi's failure to enact big ticket reforms, like easing foreign investment restrictions in retail and aviation, has disappointed investors. Investors have also been spooked by corruption and punishing regulatory shifts in India's telecom sector and a retrospective change in tax law that could cost companies like Vodafone billions of dollars.